The Buyer’s Advantage - How Business Owners Can Level the Playing Field
You’ve built a great company. Your determination and perseverance have earned you happy customers, loyal employees, and even the support of your bank. The top line continues to grow nicely and the bottom line is well into the black. From product development to customer service, you and your team have demonstrated impressive business skills.
But when it’s time for that once-in-a-lifetime event, the sale of your business, you will face an experienced private equity firm or strategic corporate buyer for whom this is just another transaction.
The playing field is not level.
This article discusses the reasons to seek advice from an investment banker now, when your business is not for sale.
First, chances are you can do more to increase value in a future sale of the company if you are currently guided by an external view of the business, from the perspective of a likely buyer. An investment banker who understands who the optimal buyers are and how they determine value can provide this important guidance.
Second, selling a company involves a series of negotiations. Agreeing to a purchase price is only the first. You will eventually need to address possible changes to the purchase price based on discovery in due diligence or missed projections, balance sheet and working capital adjustments, tax allocations, deferred payouts and rollover equity, employment and/or severance agreements, and the escrow account. Do not confuse the initial offer with final after-tax proceeds.
Buyers understand this complex and lengthy process and use it to their advantage. The best way to achieve your desired outcome is to be very well prepared. Many issues that would detract from value can be easily addressed with a little lead time and sound advice.
The value of your company will most likely fall in a range of earnings multiples typical for your industry – for example, from six to eight times EBITDA. Exactly where your company falls in that range, however, is up to the buyer – beauty is in the eye of the beholder.
A professional buyer is influenced by opportunities, risks, and other factors that may not be your main focus running the business. Managing for value is not the same as managing for growth. And without the daily feedback of a public company stock, you are flying blind.
An investment banker can help you understand how companies in your industry are valued in the current market and specifically how buyers will evaluate your business.
Components of Value
One way to look at value is as follows:
Value = Earnings x Multiple +/- Adjustments
This admittedly simplistic description starts with the quality of your revenue and earnings based on several factors from recurring sales and growth drivers to margin trends and product mix. Buyers will take a deep dive into key performance indicators. Do you know which metrics are important to a buyer, and do you have the tools to report this information?
Your exit multiple also has many components. The growth rate and dynamics of your industry may be beyond your control. But demonstrating that you have a well-run business positioned in a faster-growing industry segment conveys competitive advantages, market share growth, and future upside. You can improve your multiple if you are prepared to discuss and defend these opportunities.
On the down side, buyers will assign a lower multiple if they perceive risk in areas such as customer loyalty, IT, financial controls, intellectual property, legal compliance, your environmental record, and elsewhere.
There are tricks-of-the-trade and several basic steps you can take to minimize adjustments after an initial purchase price has been negotiated. For example, improving the efficiency of your balance sheet to free up cash and avoiding deductions for debt-like accounts, staying ahead of any revenue or earnings misses, and mitigating risks to your plan going forward. It’s fair to say adjustments rarely happen in your favor.
Be fully prepared for a lengthy and detailed due diligence process if and when a sale does occur. Whether it is a controlled auction or an unsolicited offer, the information requests and disclosure schedules will be quite lengthy and cover literally every material aspect of the business. No rock will be left unturned.
Ask your trusted advisor for typical due diligence lists to see how your reports and records stack up. Then plug the holes and address material weaknesses that can trigger adjustments to the purchase price.
Start Well Before a Sale
If a sale is not imminent, you have time to work on larger strategic issues that may be sitting on the back burner while customers take up most of your day. Most business owners know what issues to address, but rarely take the time before a transaction. Having a plan in motion is better than nothing, but proving that the plan works adds the most value.
Start with the quality of revenue and earnings. Can you generate more recurring revenue? Is now the time to hire more sales people? Can you diversify your customer base? Can you enhance your supply chain? Can you improve inventory turns?
Each of these decisions has many facets, but consider your timeline and how potential outcomes will be valued or explained at the time of a sale. For example, if opening a new distribution facility will depress profits for the first two years of operations, carefully document your expectations and all related start-up expenses. A buyer will better understand your operating results and add back those one-time expenses to normalize earnings.
An investment banker can help you prioritize the issues that have the most impact on value down the road, and can be a good sounding board for new issues as they come up.
Your attorney and accountant can address other important issues that should be resolved before a transaction begins.
Companies guided by value often operate more smoothly and have fewer risks. It is an excellent discipline even if your company is not for sale.
A thoughtful, longer term approach to building value should begin as soon as possible. When the time is right, a sale of the business will be more likely to close on acceptable terms. And you will side-step the pitfalls that cause delays, renegotiated terms, and failed transactions.
Finally, an experienced investment banker has a unique external perspective that can help you understand value through the lens of a prospective buyer. Find one who will work with you to prioritize the many activities that level the playing field and maximize shareholder value.
About Carter Morse & Mathias
For more than 30 years, Carter Morse & Mathias’s combination of hands-on Managing Director involvement has helped hundreds of business owners to plan, execute, and close transactions that maximize shareholder value.
Our expert strategic guidance and execution capabilities have proven crucial for clients, many of whom we represent in their once-in-a-lifetime transaction.
Contact Carter Morse & Mathias 203-349-8371